Econ 3229 Exam 2 Notes

Front 1

List the most common items listed under the ASSETS section of a banks balance sheet.

Back 1

Reserves
Securities
Loans

Front 2

List the most common items listed under the LIABILITIES section of a banks balance sheet.

Back 2

Deposits
Borrowing
Capital

Front 3

Required Reserves =

Back 3

Required reserve ratio * Deposit Total

Front 4

The dual banking system consists of:

Back 4

State Banks
National Banks

Front 5

McFadden Act

Back 5

1927
Restricted national banks to follow state laws on branching

Was repealed in the late 1990's, which resulted in much more consolidation of banks.

Front 6

Glass Steagal Act

Back 6

1933
Established FDIC
Established firewall between banking and other financial services. This has since been repealed, which made for more of a Universal banking system in the U.S.

Front 7

Creation of the FDIC created an increased

Back 7

Moral Hazard and Adverse Selection Problem.

Front 8

Moral hazard cause by FDIC

Back 8

Banks are more likely to give out more loans than they normally would since they know they are insured.

Front 9

Adverse Selection as a result of the FDIC

Back 9

High risk individuals are more likely to come to banks since they know the deposits are insured

Front 10

The payoff method of closing down a bank

Back 10

Used for smaller banks
FDIC pays off deposits up to $100,000.
Large depositors may lose money in this situation.

Front 11

Purchase and Assumption method of closing a bank:

Back 11

-FDIC reorganizes the bank by finding a willing merger partner who assumes all of the failed bank's deposits
-FDIC helps the merger partner by providing loans, etc
-No depositors lose money

Front 12

FOMC

Back 12

-Federal Open Market Committee
-Composed of 12 members, 7 from board of governors and 6 from federal reserve bank presidents.

Front 13

Board of governors

Back 13

Vote of conduct and Open Market Operations
Controls discount rate

Front 14

Federal Reserve Bank Presidents

Back 14

Only 5 can vote on FOMC

Front 15

FOMC

Back 15

-Federal Open Market Committee
-Composed of 12 members, 7 from board of governors and 6 from federal reserve bank presidents.

Front 16

Board of governors

Back 16

Vote of conduct and Open Market Operations
Controls discount rate

Front 17

Federal Reserve Bank Presidents

Back 17

Only 5 can vote on FOMC

Front 18

Discount loans are an asset or a liability on a bank's balance sheet?

Back 18

Liabilities

Front 19

List common Assets on a banks balance sheet

Back 19

Reserves
Securities
Loans
Deposits at other banks
Building

Front 20

List common Liabilites on a bank's balance sheet

Back 20

Checkable deposits
Nontransaction deposits
Borrowings
Bank's Capital

Front 21

Money Multiplier =

Back 21

C+1/c+r+e

Front 22

An increase in the non borrowed monetary base will cause money supplied to:

Back 22

Rise

Front 23

An increase in the required reserve ration has what affect on the money multiplier and the Money Supplied?

Back 23

It will cause both to decrease

Front 24

The great depression caused the currency ratio and the excess reserve ratio to

Back 24

increase

Front 25

Open market purchase causes

Back 25

Reserves demanded to rise and the reserves supplied to decrease and the federal funds rate to fall.

Front 26

Open Market operations - advantages

Back 26

-Quick
-Any Size
-Quickly reversible
-Fed has complete control

- No disadvantages!

Front 27

Discount policy as a tool for fed advantages

Back 27

-the fed can use it to perform its role of lender of last resort
-Due to this function the fed can prevent financial panics.

Front 28

Discount policy as a tool for the fed DISADVANTAGES

Back 28

-Confusion about the fed's intentions
-Discount rate changes may cause unintended fluctuations in money supply
-Less effective than OMO

Front 29

Reserve requirements as a tool for the fed ADVANTAGES

Back 29

-They affect all banks equally and have a powerful effect on the money supply

Front 30

Reserve requirements as a tool for the fed DISADVANTAGES

Back 30

-Raising the requirements can cause liquidity problem for bank with low excess reserves
-Frequent changes cause uncertainty for banks
-Small changes in RR have large effect on money supply.

Front 31

Which regulatory agency charters national banks?

Back 31

Comptroller of the currency

Front 32

A rising discount rate has no affect on the federal funds rate when:

Back 32

The Reserves Demanded curve intersects the vertical portion of the reserves supplied curve

Front 33

A rising discount rate will have what affect on the federal funds rate when the reserves demand curve intersects the horizontal part of the reserves supply curve?

Back 33

Federal funds rate will rise.

Front 34

Increasing the market interest rate causes what to happen to excess reserves and discount borrowing?

Back 34

Excess reserves will decrease
Discount borrowing will increase

Front 35

What is the main source of growth in the money supply?

Back 35

The money multiplier

Front 36

Open market operations are the most important monetary policy tools because they directly affect

Back 36

The money multiplier

Front 37

John Taylor says that the fed should do what when inflation rises above the fed's goal?

Back 37

Raise the federal funds rate

Front 38

John Taylor says that the fed should do what when the real GDP rises above the feds goal?

Back 38

Raise the federal funds rate

Front 39

Since the 1990's, the fed's monetary policy is based on:

Back 39

Setting a target for the federal funds rate

Front 40

The Fed is mostly independent, but it must still be wary of:

Back 40

Being limited by congress through legislation.

Front 41

An independent fed:

Back 41

Is less likely to produce higher inflation and less likely to produce a political business cycle.

Front 42

When price levels rise,

Back 42

the dollar depreciates

Front 43

The theory of purchasing power parity can't fully explain foreign exchange rate due to this factor:

Back 43

Housing and land aren't traded across borders

Front 44

Purchasing Power Parity

Back 44

Based on the law of one price.
Used to determine long run currency ratios between two countries.

Front 45

What is the main source of fluctuation in the money supply?

Back 45

The monetary base

Front 46

An increase in expected deposit outflows can have what affect on the money multiplier?

Back 46

It will cause it to decline.

Front 47

Describe the central bank's game plan.

Back 47

They use policy tools to adjust operating targets that directly impact its intermediate targets in a way that allows the central bank to achieve its goals

Front 48

Moral hazard can be reduced by:

Back 48

regular bank examinations

Front 49

Adverse selection is indirectly reduced by:

Back 49

regular bank examinations

Front 50

Regulatory forbearance does what to capital requirements?

Back 50

Raises them

Front 51

Discount loans have what type of relationship with the discount rate?

Back 51

Negative

Front 52

discount loans have what type of relationship with the market interest rate?

Back 52

a positive one!

Front 53

The federal reserve banks do all of the following

Back 53

Make discount loans to banks in their district
Clear checks
Issue and withdraw currency
Are owned by the commercial banks in their district

Front 54

An increase in the monetary base that goes into what is not multiplied in the money supply?

Back 54

Currency

Front 55

An increase that goes into what results in multiple expansion of the money supply?

Back 55

deposits

Front 56

Capital requirements

Back 56

Helps keep people more careful in the way they manage their business.